Congratulations
on your decision to read our short course on pre-construction investing. You should
be able to get through it in 10 or 15 minutes so read it now and print it if you
like. Don't let the length fool you. This course is packed full of valuable information.
The 12 Deadly Mistakes are listed below but we will also send you our complete
investing course via email (in 12 parts) over the next few weeks. So let's get
started.
Our solution
for protecting your capital and profiting from the soft housing market is to invest
in pre-construction real estate as part of a group of buyers. The softening market
and our growing number of partners has increased the quality and quantity of deals
available to us. Developers are giving us terms that eliminate most of our risks...especially
the risks associated with declining real estate values. Just to be sure you understand
the basic concept of pre-construction, let me give you a simple, brief explanation.
When
buying pre-construction real estate, you are doing just that...buying "before"
construction. There is no actual building yet, so it is sort of like owning a
contract to buy the unit at some future date...when construction is complete.
During the construction phase, your only out of pocket expense is a small deposit
to hold the unit in your name...at least if you are doing it properly.
Deadly
Mistake #1 Investing from a position of
weakness
Deadly
mistake number one is the foundation upon which all the other mistakes are made.
Avoiding this will help you to overcome all the other common mistakes. Let me
explain.
Imagine
that you and I have decided to become partners for the purpose of investing in
pre-construction real estate. We find a project that looks promising and visit
the developer's sales office on the first day of the public sale thinking, "We'll
get in early and make a killing!"
What
sort of deal do you think we will get when negotiating to buy one or two units?
ANSWER: We'll get the same "take it or leave it" offer everyone else
is getting. Now we may get a discount for buying on day one, but how will we know
we really did? More importantly, what protection will we get? What if the developer
takes two years to start construction? What if property values drop? What if he
goes bankrupt? These
are just a few of the dozens of situations that can leave us in serious trouble.
Now
imagine walking into the same developer's office with an offer to buy 25 to 50
percent of the entire development? You are now representing more than 400 buyers
who are each ready to sign on the dotted line so long as the developer gives them
a bulletproof contract. What sort of terms do you think we will get now? That's
right! We'll get virtually all the terms we ask for...even from the most prominent
developers.
There are many types of pre-construction buying opportunities.
You can buy single family homes, town homes, condos, commercial properties, vacant
land, and more. But there is a right way and a wrong way to do it. For instance,
we only do pre-construction deals if the developer agrees to allow us to resell
our units long before the construction has been completed (usually they resell
them for us).
We've
found that condo and town home projects offer us the safest and most profitable
opportunities...when done properly. But there can be many challenges with pre-construction
investing. As an individual buyer it may be the riskiest of all real estate transactions.
However, by negotiating deals as part of a group with other savvy investors, we
are all able to enjoy greater profits and overcome most of the risks.
In
the history of our group, not a single partner has ever been brought to closing
by a developer. No partner has ever lost a nickel of their capital either. And
yes...all our deals start with NET profits of 40 or 50 percent...even if market
values fall. We are not even a little bit dependent on market appreciation. More
on this later.
Understand
this. Pre-construction developers must pre-sell a large portion of the units in
each project (at least half) before the bank will ever give them a building loan.
By joining with other buyers to negotiate the purchase of a large block of units
(thus helping the developer to reach his pre-sale requirement), you will enjoy
much greater negotiating capacity when making deals with each developer.
We
have a private group of more than 400 partners (all of whom have purchased pre-construction
units using our group negotiating tactics). These are not just 400 names on a
list. Together, because of the buying power we share, we are able to profit more
than if we were to buy on our own...and with substantially less risk.
Here
are just a few of the advantages of buying and selling pre-construction with our
group during the early phase of each development:
Negotiations
and due diligence completed by the group leadership
Substantial
discounts from public prices
Instant
equity based on the terms of your purchase agreements
Small
deposits (usually 10% of the purchase price)
Letter
of credit deposit optional in most cases...instead of cash
Deposits
held in escrow and never touched by developer for any purpose (refundable if developer
or project fails)
No
construction financing
No
mortgage payment or other carrying costs
No
traveling or searching for viable projects on your own
Opportunities
to invest in non-local markets (even internationally)
Very
low probability of closing or taking possession after construction is completed
(it has never happened to date)
No
tenants
No repairs
Profitability
NOT dependent on market appreciation
40
to 50% starting NET profits (even in flat or declining markets...based solely
on the terms of your purchase contracts)
Complete
freedom and control of all decisions regarding all units you purchase
Freedom
to resell before closing (usually done for you by the developer on a first-in/first-out
basis)
Significant
appreciation potential
15
page contract addendum developed by our group's attorneys to protect you in every
deal (this document will supersede the developer's standard purchase contract)
This course
reveals things you may not have believed to be possible. Whether you are new to
pre-construction real estate or a savvy veteran, this course will stretch your
imagination and transform your expectations. Our purpose is to teach you how to
get exceptional profits from pre-construction transactions...while protecting
yourself from dishonest developers and plummeting or flat real estate values.
At
the end of this course you'll find a link to some BONUS MATERIAL, a recently
recorded audio, that will tell you about our buying club. The audio explains
precisely how we negotiate our deals, how our group functions, our partner requirements
and insights regarding our current and future projects. But be sure to read this
BEFORE proceeding to the audio.
If you need clarification on any points,
you are welcome to call us at the number provided near the end. And yes...the
40 to 50% starting net profit in flat or depreciating markets is for real.
We'll show you how to get the developer to assure you of profitability...even
if the markets weaken.
Here are the 12 Deadly Mistakes. Throughout the
course you will discover how, as a group of buyers, we are able to avoid them
all. In addition, over the coming weeks, we will be sending you 12 lessons to
elaborate on the mistakes listed below.
Never
invest alone or negotiate the purchase of less than 20 percent of any development
Never
accept a developer's standard contract without adding your own protective terms
Never
invest when property values must increase for you to make a profit
Never
give the developer access to your deposit or send money to anyone other than the
developer's escrow agent
Avoid
making deposits in cash. Use a letters of credit whenever possible.
Never
invest without price protection
Never
invest if the developer requires you to take possession before reselling
Never
give developers open-ended timelines for starting and ending construction
Never
sign a reservation agreement
Never
pool your money with other buyers
Never
invest without compensation if brought to closing
Never join an investment group that requires cash up front, compensation without
specific performance or requires you to sign a power of attorney.
NOTE:
Be sure to pay special attention to the lesson number five on how to buy pre-construction
using "letters of credit." This is different than "lines"
of credit and is becoming more and more acceptable to developers and their lenders.
This concept alone can substantially increase your leverage and allow you to
buy pre-construction units by collateralizing capital you already have earning
you profits someplace else...even equity in your own home. No kidding...and
we can show you how to obtain letters of credit with zero fees!
Enough
with the overview...Let's begin.
In order to help you understand how to make significant profits and protect yourself
from depreciating real estate values and dishonest developers, it is important
that you first understand the challenges that developers face when attempting
to get their projects underway.
The Life of a Real Estate Developer
Imagine for a moment that you are a major condo developer (like that guy who keeps
firing people in NY City) and you have decided to build a new 1000 unit luxury
condo development. Before you can begin construction you will have a lot to do.
First, you will select and purchase a piece of land. Then, you will hire a team
of architects to draw up the plans for your building. Of course you must also
obtain permission from the city and county to erect your building...get permits,
etc.
Once you
have all this done, you will need some financing. But even "The Donald"
can't just walk into any bank and get a loan for a 1000 unit project. The bank
will require you to pre-sell at least half of the units in the building before
they will agree to finance your development.
So you hire a sales team
and announce to the world that you are building a wonderful new project. This
is the most critical time for you, because the longer it takes you to pre-sell
500 of the 1000 units, the more money you are spending. Until the bank comes through
with the loan, you are carrying all of the risk and costs yourself.
In
addition, the bank will require diversification. If you go to them with an agreement
that a handful of people will buy the first 500 units, they will probably send
you packing. The banks want you to prove there is substantial interest in your
project from a diverse group of buyers...not just a few individuals (no matter
how deep their pockets are).
This
is by far the most critical time for you as the developer. If you are unable to
secure the pre-sale of half the building, all of your plans will be for nothing.
For the developer, momentum is everything. Most developers (even the biggest ones)
are just one project away from disaster.
It will generally take you from
a few months to two years to pre-sell your first 50 percent of the building. So
for as many as two years (or more), your project is still only a vision in your
mind. Most developments that are never completed, fail because they can't get
the funding before they run out of capital for marketing.
If you are
fortunate enough to pre-sell the 500 units, you have a very good chance of getting
your building loan and successfully completing your project...so long as the market
holds up and your contractors meet their obligations.
Of course, because
developers are so motivated to get their building loans, they are generally willing
to offer substantial discounts to potential buyers during the pre-sale. Their
goal is to profit most from the sale of the remaining 50 percent of the building...after
the construction has begun. They're generally happy to break even or sustain a
small loss on the first 50 percent of the project.
Discounts...With
A Catch
Because the developers are willing to cut deals with the pre-sale buyers, there
is a lot of profit potential. However, there is also a great deal of risk.
For instance, the buyers will generally be required to put up a deposit of
20-30 percent of the purchase price when they select their units. In most cases,
the majority of this money (if not all of it) will be used by the developer during
the construction process. If the developer fails to complete the project for any
reason, most of the pre-construction buyer's deposit will be lost.
Caution...Most
Developers Don't Like Selling to Flippers
In addition, the developer is more concerned with his interests than the interests
of the pre-sale buyers. Since pre-construction units have become so popular among
real estate entrepreneurs in recent years, developers have found themselves selling
more of the pre-sale units to flippers than to actual future occupants. In some
cases, as much as 80 percent of the pre-sale units have been purchased by people
who never intended to occupy them.
The result for the developers has
been competition against the owners of pre-sale units when it comes time to sell
the remaining 50 percent of the building. The second 50 percent of the building
is their bread and butter. Competing with the owners of other units can cause
long delays, slower appreciation and interfere with their ability to realize desired
profits.
Common
Restrictions & Penalties
Because of this, developers are now imposing severe restrictions and penalties
on buyers of the pre-construction units who intend to flip the properties. Purchase
agreements now usually contain terms that penalize the buyers as much as 10 percent
of the resale price if they resell prior to closing.
Additionally, many
developers are requiring buyers to close on their units and hold them for a specified
period of time before they may resell for a profit. Both of these restrictions
can significantly limit the pre-sale buyer's profits...not to mention the added
exposure to weakening market conditions.
While the real estate market
has been booming, many have been able to calculate these penalties into the formula
and still come out with a nice profit. However, should the market become flat
or depreciate, these same pre-sale buyers will be facing severe losses...not to
mention commissions to the real estate agents and a very difficult time reselling
their units.
In good times, the prices of pre-sale units can rise dramatically.
Unfortunately, developers have learned to use reservation agreements to protect
themselves should the market appreciate faster than expected. It is not uncommon
for developers to adjust the purchase prices up during the reservation period,
forcing early buyers to cough up more money and buy at a higher price than they
originally agreed.
Sometimes the developer will simply cancel the deal
and return the reservation deposit...since he can sell the unit to someone else
for more.
Of course the pre-sale buyer has wasted a great deal of time
and had his money tied up...only to lose his unit and the potential profits.
What
About The Real Estate Bubble?
If you've been
following the news at all, you've no doubt heard many of the stories about the
so-called "Housing Bubble."
How can a pre-sale buyer ever know for sure that they are getting an honest price
and a fair profit? The traditional way of buying and selling pre-construction
condos or town homes seems more like a crap shoot than a calculated business transaction...particularly
with the uncertainty of the real estate market right now.
The media hype
about the housing bubble has had significant impact on developers and buyers alike.
As buyers of pre-construction hear more and more about the bubble, they are becoming
more cautious and conservative when making decisions to participate. Think about
it...do you want to be the first buyer in a project when the stability of the
market is in question? Probably not.
Even
if you are successful in negotiating favorable pricing and the developer gives
you permission to resell before closing, should the real estate bubble turn out
to be a reality, you will still lose big time. In fact, as an individual buyer
intending to flip your unit, you MUST have appreciation in order to avoid losses.
For instance, if you have to pay a 6% real estate commission to an agent who finds
you a buyer, you had better have sufficient appreciation in order to cover that
expense.
Buyer concerns right now are causing developers major difficulty
as well. Remember, momentum is everything to the developer. If he has to market
all of his pre-construction units to end users (because investors are running
scared) it is a whole new ball game. End users take forever to make buying decisions.
They want to think it over for a few months. And who really wants to wait two
years to move into their new condo?
For the savvy pre-construction buyer,
the real estate bubble (real or imagined) may be the best thing that ever happened.
Because developers are now having even more trouble pre-selling their projects,
they need your money more than ever! And we've developed a way to be profitable
even if the market is flat or depreciating.
Creating
a Win-Win
As I've said a number of times already, it is especially important to remember
that the pre-sale period is the most critical time to the developer. While some
buyers will try to create a win for themselves in spite of the developer's interests,
there is a way for everyone to come out on top...and for the pre-sale buyers to
win in a big way.
The basis of the solution is to help the developer
during the pre-sale phase. By helping the developer to acquire his construction
loan faster, you can benefit beyond your wildest dreams.
Remember, the
developer could spend as much as two years (or more) working to get his construction
loan. The faster he gets it, the sooner he will make his profit. In addition,
if it takes him too long to pre-sell the first 50 percent of the units, his project
will never get off the ground at all.
The remainder of this course is
about how you can help the developer to succeed in pre-selling the first half
of the building. In exchange for this help, you will receive special considerations.
When you assist the developer in this way, it is reasonable to expect to receive
all of the following in return (and much much more):
Buy
pre-construction condos and town homes at rock-bottom prices
Get
the developer to accept small deposits that are a fraction of what other
buyers in the same project are making
Buy
using "no fee" letters of credit instead of cash (and get highly
leveraged profits)
Prevent
the developer from using your deposit for construction
Buy
"before" the pre-sale announcement and get the best pricing
Get
the developer to allow you to resell your unit before closing
Get
the developer to resell your unit for you
Protect
yourself and even benefit from the real estate bubble
Protect
yourself from dishonest or questionable developers
Make
money when you buy...by getting instant equity
Plus...
Get your
entire deposit back (with interest) if the developer fails or takes too long
And
Best of All...
Get
starting net profits of 40% or more even if the market is flat or depreciating...based
solely on the terms of your purchase agreement
So
how can you, an individual buyer, help a major developer to pre-sell his project
in such a way that he will give you special terms? Good question. The answer is
you can't...at least not on your own.
The solution lies in your ability
to partner with others who are also looking for pre-construction opportunities.
Please understand this! While we are talking about a partnership with other pre-sale
buyers, we are not talking about pooling money or buying as a group. Remember,
the banks want to see diversification among pre-construction buyers. Each partner
will be buying their own condos in their own names. However, each partner will
benefit from the negotiating power of the group as a whole.
This negotiation
will usually occur before the developer even makes his pre-sale announcement.
Because of this, the pre-sale buyers will be assured that no one outside the group
has received (or will receive) such preferential terms.
As you recall,
the developer must show diversification of buyers when he goes to the bank for
his construction loan. As a group, once the deal has been made, the partners will
provide individual purchase contracts for the majority of the pre-sale units needed
so the developer can get the bank financing.
Let's say that you are part
of a group that buys 180 units of a 600 unit project before the pre-sale announcement.
The next day, the developer opens up for business and announces his offering.
An hour later he picks up the phone and places a call to the local media, telling
him that he has only been open for business an hour and has already sold 30 percent
of his new building.
That day, a story hits the papers announcing that
this development is the hottest property in town. What do you think happens next?
You guessed it. Everyone wants to buy a unit in this project.
The result
of the media attention is that the developer sells the remaining 20 percent of
the pre-construction units during the next few weeks or so...and gets his construction
loan right away.
He has saved 12-24 months waiting to break ground and
you are now his best friend.
Since the pre-sale period is so critical
to the developer, your ability to solve his problem gets you all the benefits
outlined above and much more. In addition, the deal can be structured in such
a way that the developer can share in future profits...if he resells your units
for you.
Now, the pre-sale buyers and the developer have aligned their
interests. The developer wins and the buyers win.
Since this model has
been in place, participating developers have been thrilled. Not only do they get
their projects underway quickly, they now have access to buyers for all of their
future projects. In addition, the structure of the deal often allows the developers
to increase their own net profits by as much as 10 percent while at the same time
saving them a small fortune in marketing costs.
Letters
of Credit (You'll
want to Read this section twice)
Nothing
is more exciting than this...and almost nobody knows about it!
Buying
a condo as part of a group with a small cash deposit can result in significant
profits...as we've been discussing. However, letters of credit can grant you far
more flexibility and leverage with little or no additional effort or risk.
Read
this section carefully because most people confuse letters of credit with lines
of credit. A line of credit is a loan against assets like home equity. We are
NOT talking about loans here.
A letter of credit is simply a letter from
a financial institution, often a bank, saying that you have assets to back up
your commitment to a developer. Essentially, a letter of credit allows you to
use capital or equity you already have somewhere else as collateral for the letter...thus
giving you the ability to make deposits without putting cash in escrow. Since
we never let our developers access our deposits anyway, why shouldn't they let
us use letters of credit?
Most institutions will charge you 1 to 2 percent
of the face value of the letter (per year) as a fee for their assurance to a developer
that you have the capital to back up your promise. Of course if your money becomes
due and you cannot pay, the issuer of the letter is on the hook for the balance.
Since
the lender is taking on the risk, they will require some proof that you are good
for the money. Traditionally, most letters of credit have been issued against
stocks, bonds or other assets owned by the investor. The way in which capital
is held will determine what percentage of the capital is available to be used
for the letter. For instance, if you have a $100,000 stock portfolio, a lender
may issue you a letter for only 60 or 70% of the value...since there is a risk
of the portfolio value going down. There are other types of restrictions as well...depending
on how secure the money is.
So what does this have to do with you? What
it means is that you may be able to generate substantially greater profits with
the use of capital you have already invested (or saved) somewhere else. Let me
explain.
Let's say you have $100,000 in a bank CD earning 5% per year.
A financial institution would likely be willing to give you a letter of credit
for the full amount since the money is safely held in a secured account and is
not subject to volatility. Let's say they give you a $100,000 letter of credit
at 1% per year. In this example your $100,000 letter of credit costs you $1000
per year.
Next, let's say you find a developer (or we introduce you to
one) willing to sell you a pre-construction unit for $1,000,000 with a 10% deposit
of $100,000. He is willing to accept $100,000 cash or $100,000 in the form of
a letter of credit. Using the letter of credit, you now have control of a $1,000,000
pre-construction condo unit for $1,000 per year.
Even
if it took two years to resell your property, the $2,000 cost for the letter would
return at least $40,000...just based on the terms of your purchase agreement (assuming
the units didn't increase in value). If the developer failed, you would only be
out the cost of the letter. I'm sure you can see the added benefit the letter
of credit can provide.
Many savvy investors are beginning to realize that
letters of credit against current holdings (cash and otherwise) can be used to
leverage a wide variety of real estate transactions. Did you know you can freeze
a line of credit and get a letter of credit against it? That's right! It basically
means that you can gain access to letters of credit...against equity in real estate
(without borrowing the money)...so long as you first acquire a line of credit
against the equity.
Our buying club has several deals with developers willing
to allow us to use letters of credit instead of or in combination with cash deposits.
This is a trend we see continuing for some time...especially in the US.
By
the way, our buying club has established special relationships with financial
institutions offering high interest rate CD's, monthly interest disbursements
and FREE letters of credit. Whether you are interested in our buying group or
not, letters of credit should be a large part of your strategy. We'll talk
at length about letters of credit on the audio.
Buying
Club History
The model described above has been used to buy more than a billion dollars worth
of condos over the past several years. Most of the deals have been inked with
the top developers in the country.
Our group of more than 300 partners
(both individual and institutional) is now negotiating internationally to position
itself for continued profitability as the real estate market softens more here
in the US. Partners love this program as it provides them with greater protection
of their capital and the assurance of substantially higher profits than buying
on their own.
Due
to the softening of the real estate market (mostly the media hype), we have experienced
a recent increase in inventory. For the first time, we have more projects than
we have partners. As a result, we are able to cherry pick the very best projects
and some developers are offering us terms that are even better than those we have
requested. As I mentioned at the start of this course, the softening is working
to our advantage. Now you understand it is because developers now need us more
than ever.
Because of the increase in available projects, we recently
began a campaign to grow our partner base. There are dozens of projects under
negotiation right now and we are calling on our partners to sign purchase contracts
regularly.
Partners can buy as individuals or entities. Until deposited
in escrow on any actual properties, all funds remain in each partner's personal
possession. At no time will any funds be pooled or touched by any other partners
in the group. When units are purchased, small deposits are made directly to the
escrow agents selected by the developers.
I
should also mention that the group management handles all the due diligence, negotiations,
unit allocations, drafting of documents, resale and oversight of all units/projects.
We never do deals unless the developer agrees to all the terms outlined above...and
more. While management does most of the work, each partner has absolute control
over all decisions with regard to the units they have purchased. Our partners
meet monthly on our CEO conference call to get project and other updates and each
partner has a personal account representative to call anytime.
Most
recently we have been moving toward other types of pre-construction and condo
conversion deals. We have purchased town homes, land lots and we are even looking
at condo units on cruise ships. The sky is the limit so long as developers agree
to all our contract terms. Because our group has grown so large, we are making
deals with much more prominent developers.
At
the time of this writing, we just signed an agreement to buy upwards of $240 million
worth of inventory (about 40 percent) in the Mandarin
Oriental Tower, Chicago. This five-star luxury condo/hotel project was named
best-of-the-best (the #1 condo/hotel project in North America) in the June 2007
issue of the Robb Report. And like most of our deals going forward, the deposits
can be made using letters of credit instead of cash. Give us a call for details.
More
Information For Applicants & Developers
If
you've read this far, you clearly realize that it is silly to negotiate the purchase
of pre-construction as an individual buyer.
If
you're ready to learn more about how our buying club can assist you in buying
and selling pre-construction condos and town homes, etc. with favorable terms
and less risk, we encourage you listen to the recorded audio mentioned earlier.
The course you are reading now explains the basic concept, but the audio
will tell you exactly how our deals are structured. We will explain how you can
enjoy terms that others never even dream about...including how to get immediate
equity, buy using letters of credit and make a large portion of your profits when
you buy.
While
we now have more than 300 partners in our buying community...including a growing
number of institutional investors, we are adding new partners every week. However,
we are very careful about who we select and each new applicant must be approved
by our board of directors. If you have questions or are interested in applying
for membership, please call us at the number below.
To
hear the bonus audio with further details about our buying club, partner requirements,
application process and current deals, please click the link below:
Note:
To access to the audio, you will need to enter the email address you used when
requesting this free course. If you have trouble gaining access, feel free to
call us at:
(847)
793-0146 (Monday - Saturday)
If you are a developer looking for pre-sales on new construction or a condo conversion,
please tell us about your project. We are well funded and our partners are prepared
to act on short notice.
Feel
free to call us anytime. We do not sell any products or seminars. We're a private
investing club committed to education and partnership. Our purpose is to educate
you.
Thank you for taking the time to read our short course. We hope
to hear from you soon.
Sincerely,
Jeff Putnam Joint Venture
Partner Senior Executive Advisor, BPV President, Freedom By Design, Inc. (847)
793-0146
